DETROIT/WASHINGTON, Oct 30 (Reuters) - Six U.S. governors and a group of chief executives on Thursday urged the Bush administration to aid the embattled auto industry while the White House rebuffed a request for direct support of a merger between GM and Chrysler.

An administration official said the focus instead would be on speeding of $25 billion of low-interest loans for factory retooling, a step the industry’s allies say does not go far enough to reverse a deepening industry crisis. [ID:nN30295721]

Three people with direct knowledge of the talks said the deal to merge General Motors Corp (GM.N) and Chrysler LLC had hit an impasse after the administration ruled out funding it and any merger would be on hold until after the U.S. presidential election next week.

The development adds a new element of uncertainty for the embattled U.S. auto industry as Detroit’s political allies warn the sector faces a deepening financial crisis that threatens tens of thousands of jobs.

It also opens the door for Cerberus Capital Management [CBS.UL], which owns Chrysler, to restart talks with the Nissan-Renault (7201.T) (RENA.PA) alliance, one of the sources said.

The private equity firm had seen the alliance as a backstop to its talks about an outright acquisition of Chrysler by GM, one of the sources said, although Nissan-Renault Chief Executive Carlos Ghosn has said he sees any deals among automakers involving a cash element as unlikely unless cash comes from outside, such as from the government.

The sources declined to be named as they were not authorized to discuss the private talks.

GM and Cerberus declined comment. Chrysler said it was pushing ahead with its own restructuring plans.

Meanwhile, auto parts makers worried that a merger would eliminate vehicles that they supply, and a prominent industry consultant said GM could cut up to 40,000 Chrysler jobs and 16 of its 26 models.

GM and Chrysler-owner Cerberus have been in talks for weeks over a merger that would combine struggling automakers hit by a sales downturn that started in the United States and has spread globally.

GM had been lobbying for up to $10 billion in government support in advance of a merger that analysts have said would likely result in thousands of job cuts across the white-collar and blue-collar work forces with plant closings.

GM, Chrysler and Ford Motor Co (F.N) — the potential odd-man out if GM and Chrysler get together — have focused on maintaining cash to withstand the sales downturn and U.S. market share losses.

U.S. auto sales have fallen 13 percent through September and automakers expect to report October monthly auto sales on Monday that reflect the continued downturn.

All three automakers face increased scrutiny from creditors and investors over whether they have the financial strength to ride out the slump, which is now seen continuing through 2009.

PLEAS FOR HELP

The governors of Michigan, New York, Ohio, Kentucky, Delaware and South Dakota sought an immediate response to an auto industry crisis that puts at risk “the financial well-being of other major industries and millions of American citizens.

“The auto industry; their network of suppliers, vendors, dealers and other businesses and the communities that rely on those businesses face unimaginable challenges — challenges we urge you to address,” the governors said in a letter to the Bush administration. [ID:nN30275217]

Michigan Gov. Jennifer Granholm, told reporters that quick loans were needed for the industry to get through the next six to 12 months. [ID:nN30284697]

“The bottom line is that all three automakers need some liquidity, some assistance with cash and they need it right now,” Granholm said.

“The alternative is worse,” Granholm said. “The alternative is the industry doesn’t have access to funds and we lose a company or two. We don’t want to do that.”

Detroit Mayor Ken Cockrel said he would “certainly be open to government intervention” being considered to support the industry and described the potential job losses expected to accompany a GM-Chrysler merger as a cause for concern.

“From what we’ve been hearing this would involve a lot of white-collar layoffs. These people are somewhat better equipped to cope as they have more education than ordinary workers,” he said. “If it spreads to blue-collar workers, then I would like to see job training projects to requalify these workers.”

The Business Roundtable, a group of chief executives of some of the largest companies in the United States, supported Treasury providing direct capital injections to automakers and their finance companies. [ID:nN30284320]

The group sent its letter to President Bush, Federal Reserve Chairman Ben Bernanke and lawmakers.

The massive U.S. auto parts supply base, comprised of a handful of large publicly traded companies and thousands of smaller private independents, also has been worried that a merger might drive even more firms out of business.

An investment banker familiar with the talks said suppliers were in for hard times regardless of whether there is a GM deal because the industry has far too much production capacity.

“A lot of plants have got to get closed,” the banker said. “Regardless of government intervention, the impact will still be the same on suppliers.”

PARITY FOR FORD?

Ford also has had discussions with policymakers and would want some support should the government assist a GM and Chrysler merger, the automaker’s president of the Americas told reporters. [ID:nN30314817]

“We have ongoing dialogue with policymakers and the powers that be to not only talk about the challenges facing the industry, but also the challenges facing Ford,” said Mark Fields, Ford’s president of the Americas.

“We just want to make sure we continue that ongoing dialogue and make sure that whatever happens there is a degree of parity,” he said.

Kimberly Rodriguez, principal of Grant Thornton’s automotive practice, said a GM-Chrysler merger would not be optimal, but was a good choice under the current circumstances and would require government aid or outside investors to work.

“There remains risks within a combined structure,” she said. “There will be a lot of pressure on them to perform.”

A Grant Thornton study of the merger potential found 30,000 to 40,000 of Chrysler’s employees might be eliminated. The ripple effect could bring job losses in the 100,000 to 200,000 range when taking into account suppliers and dealers.

The study also found the combined company could slice up to $10 billion of costs, mainly in corporate functions such as accounting or information technology, purchasing, research and development and engineering. [ID:nN30269555] (Additional reporting by Soyoung Kim, Poornima Gupta, Kevin Krolicki and Nick Carey in Detroit; Karey Wutkowski in Washington; and Jui Chakravorty and Chelsea Emery in New York; Editing by Lincoln Feast)